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Tackling rising inequality in Asia: the case for income support programs

Christine Lagarde, managing director of the IMF, recently warned that “in far too many countries the benefits of growth are being enjoyed by far too few people”. It’s hard to believe that this observation applies to Asia, though, where growth has been so successful at lifting millions of people out of poverty. Surely, more growth must be the answer?

Yet as Asia grows, inequality rises, leaving policy makers, including those at ADB, struggling to find solutions which might reverse it. What is required is a change in Asia’s mindset. Rather than a singular focus on economic growth to reduce poverty, policy makers must recognize that re-distributional policies targeted at increasing the incomes of the poor are a necessary and essential complement to growth.

The case for income redistribution in Asia’s growing but unequal societies is becoming stronger. There are several ways in which Asian governments currently do this. For example, food distribution and commodity subsidies, especially for fuel, are common throughout the region. A better way, however, is to simply give cash directly to the poor. Lessons from Latin America and, more recently, the Philippines, show that the advantages of modern cash transfer systems far outweigh the disadvantages.

First, large scale income support programs can bring millions of extremely poor families into the social welfare system, ending decades of exclusion from basic social services. The establishment of these programs can help eliminate fiscally regressive and unaffordable subsidies, such as fuel and rice subsidies, which disproportionality benefit the rich. Yet, subsidies remain popular in Asia despite being expensive, untargeted, and harmful for growth.

Second, income transfers play an important role in the promotion of human capital, which has a well-known link with poverty reduction and growth. Families receive cash benefits as long as their kids are in school. Evidence is clear that beneficiaries of cash transfers consume more education and health care services than those without, even when the transfer is not conditioned on such uses. Cash transfers therefore have an important role in helping to achieve universal education and healthcare coverage.

Third, modern income transfers programs can protect vulnerable uninsured families from economic and climate-related shocks, which are increasingly common in Asia and the Pacific. Growing inequalities and more frequent and devastating disasters make the task of addressing vulnerability harder. In times of crisis, established income support programs enable households to avoid harmful practices such as withdrawing children from school, and reducing nutrition. Both result in catastrophic consequences for the health and long term potential of children.

Even short periods of malnutrition impact on a child’s ability to learn basic skills, reducing their average lifelong earning potential by up to 20%. According to Save the Children, the impact of child malnutrition will cost the global economy tens of billions of dollars a year by the time today’s children reach working age in 2030 (Food for Thought 2013).

Fourth, the quality of income support programs has improved due to careful targeting, good administration and new technology for identifying beneficiaries and transferring cash through the use of smartcards, and mobile-telephone banking. Opportunities for leakages are much less common in well-designed cash transfer programs than in food distribution or commodity subsidies policies which are known to benefit the non-poor. Moreover, programs have clear policy objectives e.g., increased attendance at health clinics by children and pregnant women, and these are rigorously evaluated.

So what’s the downside? Policy makers may be concerned that cash transfers lead to welfare dependency and idleness, yet empirical evidence shows anti-work incentives do not exist. These are avoided by setting transfers as low as possible and by removing unemployment as a condition for the transfer. In fact, cash transfers may well have an opposite effect on labor supply. Transfers can give low income households the additional liquidity they need to make small investments which may increase work efforts. For example transport costs to travel to, and look for, work. Other evidence shows that cash transfers can also reduce child labor.

Redistribution programs are not new to Asian governments. However, the time has come to replace inefficient commodity subsidies with less costly, modern income distribution systems targeted at those most in need.